Financial Access Without Financial Know-How Won’t Get You Very Far
By Barbara Kiviat
October 25, 2016
A big assumption that banks and financial literacy experts make is that under-served populations will be better off if brought into the mainstream of financial products including bank accounts and credit. But is that always the case?
Certainly, sensible use of low-cost credit and bank accounts that keep individuals away from payday lenders have benefits. But a new study out of South Africa raises questions. Lwanga Elizabeth Nanziri of the University of Cape Town studied South Africans who did and did not use formal finance between the years 2005 and 2010, a period when government reforms brought millions of people into the financial mainstream.
Nanziri measured individuals’ financial welfare two ways: instances of deprivation, such as going without enough food, medical treatment, or income; and ownership of assets like refrigerators, washing machines, and other durable goods. The research shows that better educated people with high incomes benefited immensely from access to modern financial products but that those with low levels of income and education were no better off for having been given access. This follows a study out of Uganda, which found that financial know-how without access to banks and basic financial products is of limited value.
South Africa is an interesting case study. It has a sophisticated formal financial sector, along the lines of what you’d find in a developed economy. But it also has an extensive, competitive informal financial sector that gives the poor relatively attractive choices. Just making banking products available, then, is of little use for many people. To help make the most of formal finance, Nanziri concludes, policies in South Africa–and by extension, in many parts of the world–should focus on increasing access but also on boosting know-how through financial education.